Frequently Asked Questions

What is a Schedule K-1 and how does it relate to LLC members?

A Schedule K-1 is a tax document used by partnerships, S Corporations, estates, and trusts, to report the incomes, losses, and dividends of a business's partners or S Corporation's shareholders. In the context of Limited Liability Companies (LLCs), each member must receive a Schedule K-1, which itemizes profits and losses. This is because an LLC is considered a "pass-through entity", meaning the profits and losses are not paid by the business itself but are reported by individual members on their personal tax returns. Each member pays taxes based on their membership share of profits and losses, also known as distributive shares. These shares should be outlined in the LLC's operating agreement. Typically, profits are distributed based on the member's percentage interest in the business. However, a different structure, known as a special allocation, can be set up if desired. Regardless of the percentage division, members are required to pay taxes on the entire distributive share, even if the LLC didn't distribute the money.